The Following Is Information on Current Spot and Forward Term

question 14

Multiple Choice

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : $$\begin{array} { | l | l | l | c | } \hline & \text { Spot 1 Year } & \text { Spot 2 Year } & \begin{array} { l } \text { (1-year maturity) } \\\text { Forward 1-year }\end{array} \\\hline \text { Treasury } & 3.0 \text { percent } & 4.75 \text { percent } & \mathrm { X } \\\hline \text { BBB Corporate Debt } & 7.5 \text { percent } & 9.15 \text { percent } & \mathrm { Y } \\\hline\end{array}$$
-Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year) .

• A)6.53 percent.
• B)10.83 percent.
• C)5.75 percent.
• D)6.925 percent.
• E)1.017 percent.

Grasp the significance of diversification in reducing portfolio risk and understand the distinction between diversifiable and non-diversifiable risks.

Know how the security market line represents the relationship between risk (beta) and expected return and how it aids in determining if an investment is correctly priced.

Understand how to compute the expected return on a portfolio and the role of portfolio weights.

Recognize the importance of the correlation between stocks in a portfolio and its effect on portfolio variance.

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Definitions:

Liability

A legal obligation or responsibility; it can refer to financial debt or other forms of legal responsibilities individuals or entities may have towards others.

Guarantee

A legal promise to ensure the fulfillment of an obligation or repayment of a loan in case the original party fails to do so.

Terminate

Refers to the action of bringing something or an agreement to an end before its natural conclusion.

Cancellation

The act of crossing out a writing. The operation of destroying a written instrument.